From Edison to AOL, America has taken risks

From an address given by Felix Rohatyn, the United States ambassador to France, delivered at the Salondes Entrepreneurs, Paris

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In 1898, Mr JP Morgan provided $1m to Mr Thomas Edison to launch the Edison Electric Lighting Company; this start-up is today's GE with a market value of $500 billion.

In the same tradition, in 1985, Steve Case borrowed $250,000 to start an internet company named America On Line. When its merger with Time-Warner is completed later this year, AOL Time-Warner will have a market value of about $350bn. Both GE and AOL, 100 years apart, are powerful examples of the American dynamic.

I cite these examples to make two points: first, that risk investment in innovation is not new in America and, second, that it is accelerating at an exponential rate.

However, it is something of an oversimplification to think that all one needs is capital and ideas to create tomorrow's AOL and tomorrow's GE. There are a number of other aspects to the so-called "American model" that have made this possible.

1) Deregulation: beginning with the presidency of Jimmy Carter in the Seventies, a steady process of deregulation has opened up the American economy. Airlines, banks, trucking, railroads and telecommunications were opened up to competition.

2) Restructuring: the major restructuring of American enterprises took place in the Eighties and has not stopped since.

3) Technology: almost 50 years ago, Professor Fred Terman moved from MIT to Stanford where he headed the engineering department. Two of his early students were Bill Hewlett and David Packard. A few venture capitalists headed by a friend of mine from New York, Arthur Rock, moved to San Francisco and helped to create what Andy Grove of Intel calls the "ecosystem of Silicon Valley". Ideas, capital, academia in close proximity, freedom to experiment, to f ail, and to succeed.

The culture of Silicon Valley as well as its development had an important impact on the United States economy. The culture of risk-taking entrepreneurship brought with it high levels of stock ownership throughout Silicon Valley companies. Their spectacular success over the decades created hundreds of millionaires among founders and employees, and the principle of employee participation in ownership is now spread throughout American businesses. It is fundamental to "popular capitalism".

Last but not least are the technological advances brought about by these industries. It is estimated that 40 to 50 per cent of American growth in the last decade is due to technologies developed by Silicon Valley industries. It is less recognised that resulting productivity improvements have allowed high growth in America without the inflationary results that might have resulted otherwise.

4) Popular capitalism: the major American investments in technology and the result in economic growth have created another important reality: the premium financial markets put on growth and leadership in technology have given the United States economy a little-recognised advantage. On the surface, the American and European economies are roughly similar in size, in population, in GNP and standard of living. However, there is one significant difference.

The United States market capitalisation of about $12 trillion is much larger, almost three times the total market capitalisation of the European stock markets combined. It is the result of the compound effect of heavy investment in high growth industries for the last 50 years; it is also the result of the enormous growth of pension funds, mutual funds and other institutional investors. Eighty million Americans, directly or indirectly, own shares in American companies.

This enormous pool of capital underlying our economy gives businesses in the United States great flexibility and strength and the fuel for economic growth. It is the platform for "popular capitalism".

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